Oil is surging in the global markets and this has transformed into higher gasoline prices at the pump, which now average over $3.50 per gallon and may be heading higher. Gasoline prices are surging at the pumps. The jump in fuel costs will cut away at the disposable income of consumers and this would impact economic growth. The situation is made worse given that the busy summer driving season is only a few months away.
The situation in Libya continues to be a problem, as the conflict has worsened with intense fighting. There was news that Libya may enter into peace talks with the rebels and thus avert a major civil war, but this has yet to happen.
At issue is the oil in the ground that Libya is sitting above. The country has the 12th largest oil reserve in the world. Col. Qaddafi knows this and wants to keep the oil under his control. Libya has cut about one million barrels per day from its regular 1.6-million-barrel daily production. Saudi Arabia has increased its oil production to try to compensate for the loss, but oil continues to ratchet higher, with the April oil on the NYMEX trading at over $106.00 per barrel on Monday.
Basic economic analysis tells us that the surging oil prices are a real problem that could impact global economic growth. If the tensions spread through the oil-producing Middle East, oil could spike much higher and drown out the recovery.
There is news that oil-cartel Organization of Petroleum Producing Countries (OPEC) may increase its production output for the first time in two years to help offset the loss of the oil flowing from Libya. This would be positive, but again a temporary solution. The fear is that the conflict will intensify in other OPEC and non-OPEC oil producing countries in the Middle East. In this event, this would be damaging to the global economic renewal.
Technically, a look at the charts shows potentially higher prices ahead. The near-term technical picture for the April oil is bullish, with the contract holding above $105.00.
The April oil is trading above its 50-day moving average (MA) of $93.28 and well above its 200-day MA of $85.26. An upward move could target $106.95 and $108.96.
Energy mogul T. Boone Pickens, in his investment advice, suggests that oil could reach $120.00 per barrel, which is why this supporter of natural gas energy feels that the country should reduce its dependence on foreign oil. There is nothing surprising here, as a worsening of the situation in Libya and the surrounding regions could easily drive oil higher.